As retailers push into new cities and brands lean hard into brick-and-mortar as a strategy, it has become incredibly difficult to find space for a new storefront.
Financing constraints due to elevated interest rates as well as zoning and infrastructure restrictions in some jurisdictions have limited construction of retail developments, limiting the amount of space on the market. Retail construction completions are at their lowest level in more than 10 years, per research from CBRE. The availability rate for retail nationally in the second quarter was 4.7%, the lowest since the commercial real estate brokerage began tracking this figure in 2005. Cushman & Wakefield and JLL research also show availability at or near record lows.
This has created a highly competitive environment for retailers looking to expand and has made the most in-demand locations almost completely unattainable.
“Everything in real estate just moves very slowly, and so, it’s just going to take some period of time for the supply-and-demand equation to balance,” Paul Gaither, svp for CBRE in Nashville, told Modern Retail. “The tenants that are able to pay those higher rents and still have successful businesses will win the day, and the ones that can’t just will have a very limited ability to expand.”
The Raleigh, Nashville, Seattle and Charleston, South Carolina, metro areas were among the tightest of 69 retail markets in the second quarter with less than 3% of space available, CBRE found. Space that is actually desirable may be even harder to find, as that small amount of space available may include older, dilapidated space that is difficult to lease.
Low supply also drives up rental rates, which increased 2.3% year over year nationally in the second quarter and rose as much as 8% in Miami, according to CBRE.
Breaking into a tight market
Raleigh, North Carolina, the third fastest-growing U.S. city of those with at least 250,000 residents from 2022 to 2023, showed the lowest retail availability rate of 2.3% in the CBRE study. Raleigh’s population grew about 2% between 2022 and 2023 to just over 482,000 residents, according to an Axios analysis of Census data. High population growth has helped strengthen the region’s retail market, according to an April report from Lee & Associates Commercial Real Estate Services.
Johnnie-O, a Los Angeles-based premium apparel brand previously only found online and in wholesale, opened its first standalone store in Fort Worth, Texas, in 2021. The company had been wanting to open in Raleigh since it began opening physical stores as it already had a design, sales and marketing hub there. The brand will open its first Raleigh store in September.
The company began looking for space in Raleigh earnestly in early 2023, Matt Ferrer, svp of sales for Johnnie-O, said in an email. He said the company looked at about three or four locations but focused especially on the North Hills development about five miles north of downtown, and had the benefit of existing relationships with developers, landlords and brokers.
Ferrer said Johnnie-O’s experience in Raleigh was the same as in most other markets his team has been looking in: inventory is tight and there are few spaces to look at.
“For us, that requires a tremendous emphasis on relationships with developers, landlords and brokers/agents — the true retail experts who can mine for opportunities and set us up to move quickly if/when those opportunities avail themselves,” Ferrer said. “Those experts really are the ones navigating the challenges and allowing us to be focused on the brand and whether a given space is a fit for how we want to show up and connect with consumers. If it isn’t, we’re willing to wait.”
Intense competition
Fast-growing Sun Belt cities have seen especially high demand for retail space and have some of the lowest availability rates, making it difficult to get into most popular developments or communities in those markets.
“There is a significant amount of competition to lease space and landlords are in the driver seat when trying to get deals done,” Joseph Purze, a retail broker with CBRE in Charleston, South Carolina, said in an email. “Landlords in the Charleston market have a high level of confidence that their space will get leased at a premium with limited inventory available as alternative options for tenants seeking space in the market.”
Justin Greider, svp for JLL in Florida, said retailers trying to get to the scale they need to operate effectively in Florida now need to look more broadly at which areas within the state to consider. Because of the high occupancy and demand, he said their wishlist of potential locations has to be much longer than it would have been in previous years.
“What we’ve advised the groups that are coming in now is, hey, all of those top one or three or five [locations] that are on your list are on everybody else’s list and have been since 2017,” he said.
Greider said competition can push rental rates up to 10% to 25% annually in some submarkets, and that tenants have become more aggressive in making offers to make sure they get the best possible spots within retail centers.
He said, hypothetically, if Five Below and Ulta were both looking five years ago at a desirable corner space and a less visible storefront a block away, one of those tenants would have paid only a little bit more to take the better spot. Now, he says there’s a far bigger gap between offers on the best and second-best spaces.
“People kind of outdo each other to get to the top,” Greider said. “The bidding has gotten to be so much higher and so much more incremental, that what we see is when a group comes in, they may pay way, way, way up to get that tier-one spot.”
Source: modernretail.co
